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UK debt provider Intermediate Capital Group has warned that the debt markets are likely to remain effectively closed next year, hitting leveraged buyouts even further.

Global lending volumes to the leveraged loan markets has been dramatically curtailed since the onset of the credit crunch, with $142bn (€110.6m) of deals so far this year – a 77% fall compared to the same period last year – according to data provider Deologic.

Tom Attwood, a managing director at ICG, who spoke out about the possibility of a credit crunch in the months leading up to August 2007, said the lack of lending was likely to continue next year.

He said: “The primary leveraged buyout market is likely to remain effectively shut for the next year, limiting our investment opportunities in that segment. While these market conditions prevail the secondary loan market will continue to offer some extraordinary investment opportunities.”

He added: “This will substantially reduce the number of buyouts.”

The lack of availability of debt has placed most buyouts on hold throughout the first half of next year, according to most debt market and buyout participants, although until now few have said they expect it to last throughout the whole of 2009 as well.

As ICG reported its interim results, Attwood said he expected more buyout firms would look to do deals using equity, mezzanine and maybe some bank debt, with an eye to refinancing later on, due to the low lending volumes.

Early examples of this trend include BC Partners' acquisition of €500m German manufacturing company Starkstrom Geratebau using equity and a vendor loan note last month.

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ICG confirmed the first close of its Recovery Fund, set up to buy secondary leveraged debt, on €875m, and the $1bn final close of the firm’s Asia Pacific Fund.

For the half-year to the end of September, ICG’s profit before tax declined by 72% to £39.8m (€46.7m) on the same period last year. It said this was due to a 360% increase in provisions for underperforming loans to £42.8m and lower levels of realisations. But its core income was up by 30% to £84.6m and the firm grew its loan and investment portfolio by 12% to £2.6bn. ICG’s shares rose16% to £8.24 per share at 11:58 GMT.

Separately. in an indication of the negative sentiment relating to larger private equity deals, the listed trust of UK buyout firm Candover was hit by share price falls after it was downgraded today.

Candover Investments was downgraded today by UK bank Cazenove by two notches to underperform, causing the firm’s share price to fall 15% to £7.26 per share at 11:23 GMT.

Christopher Brown, a Cazenove analyst, said the downgrade was due to the bank’s more cautious view of larger buyouts and concerns it had about Candover’s fund management business being unable to take advantage of “arguably more attractive” strategies such as leveraged loans, secondaries or mezzanine.

Brown said the lack of flexibility of Candover’s fund management business meant it would struggle to raise significantly more than its €2.8bn first close. Candover could not be reached for comment.

Candover declined to comment.

• Listed alternative asset manager American Capital made $74m (€58.2m) realised gains in the three months to September compared to $71m in the same period last year.